In the Investing Game: Defense (Sector) Always Wins

In a 2001 PBS Frontline interview with famed political scientist and former US Secretary of State Dr. Henry A. Kissinger, regarding the topic of US and China military spending, the great American diplomat was quoted:

“The Chinese military budget today is officially listed as, I think, about $15 billion. But even if you double it, that’s only a tenth of ours. So the possibility of China challenging the United States for the next ten years over the Pacific is next to zero. There could be a conflict between us and China over Taiwan, but I think that, too, will not occur with the proper policies on both sides.”

Fast forward to 2017 and to the ever present tensions between the US and China over potential disputes in respect to the South China Sea and the status of Taiwan, The Chinese government no longer spends a tenth of what America does on its defense budget, but they’re still pretty far behind. China’s 2017 proposed military budget stands at ¥1.02 trillion yuan or $147 billion US dollars. This is about a quarter of the Trump Administration’s proposed 2017 Department of Defense budget of a whopping $654 billion dollars. That equates to about a 10% increase in year over year military spending for the United States government.

However, the US has consistently been a big spender on defense for the last couple of decades. In 2016, it was noted that the US defense budget was larger than the next 7 spenders combined as shown in the picture below:

So if you are aware of these facts as an investor, you’ve proably asked yourself on occasion, in some form or the other, “Gee whiz, I wonder if there are some publicly traded companies with military contracts that are skyrocketing in value due to the US’s insanely huge budget?” Well let’s just pretend that’s the case if it isn’t. So which companies are benefiting from this phenomenon? Well the following is a list of the top 9 US military contractors as reported in 2015.

Lockheed Martin

The Boeing Company

Raytheon Company

General Dynamics Corporation

Northrop Grumman Corporation

United Technologies Corporation

L-3 Communications

BAE Systems

Humana Inc.

If you compare the stock returns of just the top 5 companies on this list to the overall S&P 500 returns since the end of the last recession (see graph below), you can clearly see the defense sector is where smart money needs to be:

So in general with stocks in 2017 at all times highs and the stocks on the list above being out of reach at this point for most with prices ranging from $160 to more than $270 per share, how can someone just now learning about this “sure bet” get in on the action without risking bankruptcy in the process? Well, there are a few ways for those in the know.

The first and proably the most obvious way is through the use of ETFs or Exchange Traded Funds. An ETF tracks a basket of assets like an index fund while trading like common stock on a stock exchange (We talk about this extensively in Lecture 11 of the No Bull Investing for Financial Freedom Course). The largest ETFs in the Aerospace & Defense sector that have exposure to the companies (and more) above include:

iShares U.S. Aerospace & Defense ETF(Stock Symbol: ITA)

PowerShares Aerospace & Defense Portfolio ETF(Stock Symbol PPA)

SPDR S&P Aerospace & Defense ETF(Stock Symbol: XAR)

While these ETFs may come a bit cheaper and provide better diversification to an overall portfolio, someone just starting out may still need a more cost conscious alternative. That’s where new and exciting platforms that allow fractional share purchasing of stocks comes into play. Platforms & mobile apps such as Motif Investing and Stash, just to name a couple, allow investors to get exposure to expensive stocks right now for sometimes as little as just $5 by purchasing fractional shares in preorganized weighted portfolios designed around specific sectors or themes (We also talk about in Lecture 10 of the No Bull Investing Course). Using this method, anyone can start to build a thriving & diverse portfolio in any stock or sector right now without having to wait for “the day I have money to invest”.

(You can see a couple of examples below from both Motif Investing and Stash below.)

Motif Investing — 1

Motif Investing — 2

Stash App:

So are you playing defense or just watching others win this game? Tell us in the comments below.